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A stock market index called the CAC 40 measures the performance of the 40 largest companies listed on the Euronext Paris exchange, which is the main stock market in France. The CAC 40, which stands for Cotation Assistée en Continu, is followed by traders throughout Europe and the world and is considered an important indicator of the health of the French economy.
The CAC 40 is a market capitalization-weighted index, which means that, like the German Dax or the FTSE 100, the most highly capitalized companies in the index have a greater weight. It was introduced in 1987 with a value set at 1,000.
The body that chooses and selects the participants in the CAC 40 shares is called "The Scientific Council". The Autorité des Marchés Financiers (AMF), the Direction du Trésor and the French Central Bank participate in the decision-making process of the Council. The company must be headquartered in France and must meet specific trading volume and CAC listing requirements, which are based on the regulations of the Paris Bourse (Euronext Paris Exchange). Market capitalization is calculated based on the issuer's shares and a minimum free float of 15%. The CAC 40 differs from other global indices in this respect because it looks for market capitalization while others, such as price-weighted indices, do not. The Index Committee evaluates the market capitalization indices, most notably on the third Friday of September each year.
Every three months, an independent steering group reviews the composition of the CAC 40 companies, which may result in changes. The purpose of this review is to ensure that the selection and weighting of the index accurately represents the underlying market. French multinational rolling stock company Alstom, which was listed in September 2020, is a relatively new member of the index.
The CAC 40 is determined on the basis of price performance. The formula is based on the number of shares currently included in each constituent's index, multiplied by the most recent closing price, then divided by an index divisor. The initial index capitalization base and base level are used to determine the divisor, which is adjusted for changes in composition.
If the stock prices of the companies in the index are rising or falling, this can be read in the CAC 40 price. A rising company or group of companies is reflected in the overall index price if the CAC 40 price is rising. Conversely, a decline in the CAC 40 indicates a decline in the share price of the companies in the index. The CAC 40 ranking is determined on the basis of a weighted average of share prices. As a result, companies with a higher weighting often experience fluctuations in their share prices that have a disproportionate effect on the overall index.
The performance of the French and European economies, as well as external factors, are among the many fundamental and technical factors that influence the price of the CAC 40. Exchange rates, economic statistics, commodity prices and the European Central Bank's monetary policy all have a significant impact. There is no certainty that the movement anticipated by these drivers will actually occur, so traders should consider the interaction of influencing variables rather than focusing on one aspect. That being said, here are some crucial factors to consider when trading the CAC 40.
The overall money supply and credit opportunities tend to increase and interest rates decrease when the European Central Bank's monetary policy is accommodating. As a result, corporate debt becomes more attractive to borrow and less expensive to pay, which opens the door to corporate expansion and often drives stock prices higher. The release of economic data can also have a significant impact on trading choices. One factor that can affect stock indexes is inflation, as it can reduce profit margins across all sectors and is seen as a possible precursor to higher interest rates in the long term. For example, in May 2021, inflation concerns caused the stock prices of CAC 40 leaders such as LVMH and L'Oreal to fall, causing the overall index to drop 1.3% in a single day.
As mentioned earlier, large weighted companies have a greater ability to influence the index than smaller components. For example, Total has much more power than Renault to influence the price movements of the CAC 40.
Events such as the Great Recession and the coronavirus epidemic are likely to have an impact on market demand. For example, the 2020 pandemic led to a sharp decline in industrial production and market demand, causing the CAC 40 to fall 40% from its record high in February of that year to its current level in March.
The CAC 40 has had an average annual return of 4.6% over the past 10 years. The profit that the managed funds will have generated for investors in a year is approximately represented by the average returns of the CAC 40.
The most popular methods for trading the CAC 40 include derivatives such as CFDs, futures and options, as well as ETFs. You can gain exposure to all 40 organizations using any of these tools from a single seat.